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American States Insurance Co. v. Insurance Company of Pennsylvania

United States District Court, Ninth Circuit

January 24, 2014

AMERICAN STATES INSURANCE COMPANY, Plaintiff,
v.
INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA, Defendant.

MEMORANDUM AND ORDER

MORRISON C. ENGLAND, Jr., Chief District Judge.

Through the present lawsuit, Plaintiff American States Insurance Company ("Plaintiff") seeks redress from Defendant Insurance Company of the State of Pennsylvania ("Defendant"), alleging that Defendant is responsible for some or all of the payment of insurance defense costs incurred for its insured, Sierra Pacific Industries ("Sierra"). Both Plaintiff and Defendant had issued insurance policies covering Sierra. Plaintiff's Complaint asserts common law claims of declaratory relief, equitable subrogation and equitable contribution against Defendant, and seeks reimbursement for some or all of the defense costs incurred by Plaintiff in defending lawsuits filed in the aftermath of a 2007 wildfire known as the Moonlight Fire. The jurisdiction of this Court is premised on diversity of citizenship pursuant to 28 U.S.C. § 1332.

Presently before the Court is Defendant's Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.[1] For the reasons set forth below, Defendant's Motion to Dismiss will be granted in part and denied in part.[2]

BACKGROUND[3]

In February 2007, Sierra obtained rights to a timber harvesting operation on a parcel of land in Plumas County, California. Sierra then hired Howell's Forest Harvesting ("Howell") "to perform certain timber harvest operations" on this land under the terms of a logging agreement. Pl's. Third Am. Compl. ("TAC"), ¶ 6. Under the terms of the logging agreement, Howell was required to obtain Commercial General Liability ("CGL") insurance and to name Sierra as an additional insured under its CGL policy.

In July 2007, Plaintiff issued CGL insurance to Howell. Sierra was included as an additional insured under a "Liability Plus Endorsement" page stating that an insured under the CGL policy includes "[a]ny person or organization... for whom you are required by written contract, agreement[, ] or permit to provide insurance." (Id. at ¶ 12.) However, this insurance coverage for Sierra as an additional insured was limited "only to the extent [Sierra] [is] held liable due to:... [Howell's] ongoing operations for [Sierra]." (Id.) Thus, while there is no dispute that Plaintiff's coverage for Sierra was primary in nature, it was limited to Sierra's vicarious liability as to Howell, and Sierra's independent liability was not covered under Plaintiff's CGL Policy with Howell.

In October 2006, Defendant issued Sierra a commercial umbrella insurance policy that provided both primary and excess coverage. Defendant's policy for Sierra delineates its duty to defend as follows:

[Defendant] shall have the right and duty to defend any claim or suit... when...
(a) The applicable limits of insurance of... any... underlying insurance... [has] been exhausted by payment of claims or suits to which this Policy applies; or
(b) Damages are sought for... property damage... covered by this Policy but not covered by... any other underlying insurance providing coverage to [Sierra].

(Id. at ¶ 19 (emphasis in original)). Thus, under clause (a), Defendant's policy provides excess insurance when Sierra is vicariously liable with Howell and Plaintiff's policy limits are exhausted by payment of claims, but Defendant's policy provides umbrella, or primary, insurance under clause (b) when property damage arises from Sierra's non-vicarious liability with Howell pursuant to Plaintiff's CGL policy.

In September 2007, "Howell employees were allegedly operating bulldozers... pursuant to the [l]ogging [a]greement [with Sierra], " when a fire ignited nearby that "eventually burn[ed] approximately 65, 000 acres in the area." (Id. at ¶ 8.) Sparks caused by Howell's bulldozers allegedly caused the conflagration, which became known as the Moonlight Fire. Multiple lawsuits were filed against both Sierra and Howell as a result of the fire - all of which Sierra tendered to both Plaintiff and Defendant. Plaintiff accepted Sierra's defense in all of the fire-related lawsuits "without a reservation of rights to deny coverage for any damages awarded against Sierra, subject to available policy limits and California law...." (Id. at ¶ 26.) Thus, Plaintiff agreed to defend and indemnify Sierra for not only suits where Sierra was vicariously liable with Howell - which was covered under Plaintiff's CGL policy - but also where Sierra was independently liable.

Because Plaintiff's CGL policy only covered Sierra for vicarious liability with Howell, however, Sierra took the position that Plaintiff had a conflict of interest in defending Sierra. As a result of this conflict, Sierra argued it was entitled to independent counsel. Sierra maintained this stance throughout the lifetime of the fire-related lawsuits - despite the fact that Plaintiff accepted defense of the lawsuits without reservation - and Sierra obtained outside counsel for its defense. At no time did Defendant defend or attempt to defend Sierra in any of the fire-related lawsuits.

In July 2012, the fire-related suits against Sierra settled, exhausting both Plaintiff's and Defendant's respective policy limits. Defendant disputed its defense costs with Sierra, but Defendant and Sierra have settled this dispute. Plaintiff and Sierra also disputed defense costs with one another, but Plaintiff settled that dispute as well and "released all claims against [Sierra]... while expressly preserving all [Plaintiff's] rights against [Defendant] with respect to its payments of Sierra's defense costs...." (Id. at ¶ 54.) ...


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